Commentaries

On The Road Again

“Good investors gather information, put that
information into current and historical context, then make sound decisions.”

After being detoured for five months, it appears that
equity markets are back on the main road. The detour took its toll in both
time and energy. Most major market indexes are resetting back to the beginning
of the third quarter in terms of price, which represents the main road. As is
the case after a long detour, the passengers are hungry and the vehicles need
to be refueled. For financial markets, this sort of ‘rest stop’ is normally
represented by a trading range. There is a lot of economic data being released
this week, which generally takes a few days to digest. It would be nice for the
markets to take a break and stretch their legs.

The recovery rate for equities was surprisingly fast, as
they have risen for nine consecutive weeks. That pace cannot continue
indefinitely. The Russell 3000 Index is now almost three percent above its 50
and 150 day moving averages. A pullback to those levels would be both healthy
and give those rising averages an opportunity to boost the index back to its
late September highs. Should the Russell 3000 choose to challenge those highs
immediately, the temptation to take profits could be overwhelming.

It appears that the only ‘casualty’ during the correction/detour
was the oil and gas sector. Everything remotely associated with the oil and
gas industry is still mired near their correction lows. Defensive industry
sectors such as utilities, real estate, consumer staples, and healthcare were
beneficiaries during the equity market declines, and have largely retained
their gains. Offensive industry sectors, which were the hardest hit during the
correction, attracted the most investment capital during the recovery. This is
generally the case during corrections within the context of a bull market.
Couple that fact with the impossibility of precisely timing equity markets and one
can see why it’s so difficult to trade efficiently during a market correction, and
why we rarely attempt it.

International equities have continued to tag along
behind U.S. markets. European equities in particular had been experiencing
lackluster results for most of 2018 even before the U.S. correction. When they
pushed even lower during the U.S. correction they surrendered all of their 2017
gains as well. Their post-Christmas bounce has not been as rewarding, but the
recovery from that deeply oversold condition may help them down the road.
Emerging markets, on the other hand, are painting a much prettier picture. They
have broken a long-term downtrend, recovered their 50 and 150 day moving
averages, and are benefiting from the promising outlook for U.S.-China trade talks.

Bonds have actually provided the most pleasant surprises
of all. For starters, they declined in the fourth quarter while equities
were declining, rather than countering the move. Their declines were generally
far less than those seen in the equity market, but they still pulled back.
Then, in December, they started to push higher, and when equity markets bounced
upward after Christmas, bond markets pushed even higher! In January and
February investment grade corporate bonds, municipal bonds, and government
bonds continued to move higher with equity prices and have broken out of a
three-year trading range. What a wonderful surprise!

The road ahead still holds several questions, but
right now there is not an orange barrel in sight. The benefit of continued
positive developments in the trade/tariff talks is the strongest catalyst for
U.S. and international equity markets. Any perceived difficulties in that arena
will undoubtedly be blamed for future market volatility. The Wall is a
non-event for domestic equities, but the Emergency Powers Announcement was credited
for a very sharp daily rally. The news media’s assaults on the POTUS have
become white noise, as has the circus in Congress. It comes back to the
economic numbers being reported and the markets’ response to those reports. The
bottom line is that we are in a much better position than before. And that’s a
good thing.